Demonizing monetizers undermines the patent system

Phil Hartstein, taken November 6, 2014.

Phil Hartstein is the President and CEO of Finjan Holdings, Inc. (NASDAQ: FNJN). Finjan owns a portfolio of patents related to toftware that proactively detects malicious code and thereby protects end users from identity and data theft, spyware, malware, phishing, trojans and other online threats. Founded in 1997, Finjan developed and patented the cybersecurity technology that makes up its portfolio. Since the sale of its hardware and software operations Finjan’s primary source of revenue has come from the licensing and enforcement of its patent rights.

Hartstein has seen the industry from a variety of different rolls, starting his career as a patent engineer with Knobbe Martens, before moving into he monetization and dealmaking side of the industry. Hartstein joined Finjan in 2013, coming over to the company from IP Navigation Group, where he served as Vice-President and was responsible for portfolio enforcement across a range of technology sectors. Prior to his time at IP Nav, he spent time working with Rembrandt IP Solutions, IPotential and Ocean Tomo.

On January 6, 2015, I interviewed Hartstein, which appears below. We had a wide ranging and lively discussion about the current state of the patent market, how the pejorative use of the term “patent troll” does nothing but attempt to denigrate innovators as second-class patent owners simply because they don’t manufacture, efforts to promote ethical licensing standards, and patent reform. This conversation is also provides a preview of an upcoming free webinar on Thursday, February 5, 2015, at 12pm ET. I will be joined by Hartstein and Scott Burt, who is Senior VP and Chief Intellectual Property Officer for Conversant, for a discussion about Ethical Patent Licensing.

Without further ado, here is part 1 of my interview with Phil Hartstein.

[Interviews]

QUINN: Thanks a lot, Phil, for taking the time to chat with me today. I know you’re in the thick of the licensing industry and some folks may even call you a “patent troll,” so I’d like to get your thoughts on a couple things initially and then we could go from there. First, what is the state of the market for patents? And, two, I’d like to pick your brain on this whole notion of who is a patent troll and how you actually define that term?

HARTSTEIN: Thanks, Gene, I appreciate the opportunity. The state of the market for the patent industry in particular for patent assets in a transactional context is challenging both for patent sales and for efficiency in licensing transactions. The reliance upon intermediaries is waning as the in-house savvy within tech companies is increasing. The transactional values are down. More reform is likely on the horizon as a result of oversimplification and outright name calling. I think we need an increased focused on the behaviors of patent owners and prospective licensees/acquirers, individually. I still believe that – overall – there will always be a market for good patents.

QUINN: I think that’s the point that you keep hearing over and over and over again, that the market has flown to quality, which it probably always should have been there, but for a long time there was this viewpoint that just having the biggest war chest was the best approach.

HARTSTEIN: I think that’s right. I think if you were to back up five years ago with a bird’s eye view of the market, maybe a little bit more, and you were attending a conference you would hear discussions amongst large corporations who were allocating more resources to the filing and prosecution of patents because they felt that as if they were in a weaker position than some of their competitors. Fast forward a few years and that discussion has moved to one of building “quality” portfolios. I think there is a balance in there somewhere at which you a minimum base of quantity then you really should shift towards quality.

QUINN: So now what are your thoughts on this whole issue of patent trolls? I know that’s a loaded phrase. I use the term a lot myself. I use it partly because I’m trying to capture a certain shock value. I’m convinced that if those who so quickly vilify patent trolls really stopped and thought about who they were calling a patent troll they wouldn’t use the term. For example universities, independent inventors, startup companies, or research and development companies, these are not what the term “patent troll” conjures up. It almost seems like the term has morphed into meaning all patent owners and I just think that’s ridiculous.

HARTSTEIN: Yes, I would say two things to start the discussion. My view is that it’s intentionally inflammatory and, as a professional in this industry, I would tell you it’s not productive for anyone while undermining the Patent System. I think what we’re looking at is an attempt to differentiate a product producing company as a higher class of patent owner by shear virtue that they sell products but what about all of the other start-ups and companies which raised capital, innovated, patented, and couldn’t effectively compete against larger players, are their contributions somehow less innovative? I’ve been reading your blog and others about what Alice actually means to some operating companies and larger organizations and how it could potentially put at risk significant portions of their own portfolios as well. So I think the use of that phrase, which sprung out of Intel and has now been painted across mainstream media outlets, it’s gotten out of control and we have yet to see the full extent of the impact.

QUINN: I wrote an article not long ago about how there were certain players in Silicon Valley that wanted a weaker patent system for their own reasons. Now, I don’t begrudge anybody lobbying Congress for things that will benefit them. But it would have been nice if somebody at some point in time had opened their eyes and noticed what was going to happen. Weakening patent rights has caused the whole system to be thrown into flux and all the assets are being devalued. Be that as it may, and some will disagree obviously, but I do think that there has been a very concerted effort to paint a negative picture of patent owners. And I worry that the effort has been so successful and the picture has become so negative, almost a caricature of evil, that there’s a lot that needs to be done to reeducate the public, reeducate the media and most importantly reeducate Congress.

HARTSTEIN: A lot of interesting points in your comments. I would definitely agree with you that the phrase itself is an over simplification of a nuanced asset class and complex issue. The patent system itself affords patent rights which strangely, to most, affords its owner a negative right which means the only value to a patent is one’s ability to exclude others from making, using, or selling the patented invention. Unfortunately, a lot has been done over the past decade to diminish these rights and subsequently the value of patents. Within the industry we talk a little bit about the pendulum swinging back and forth in favor of patent owner rights and I think we’re certainly seeing it stuck against patent owners, all patent owners, due to the oversimplification of the issues including demonizing those who monetize their patents and accusations that the US Patent System is entirely broken. While the pendulum may be stuck against patent owners, I think we can do a lot to clean up the reputation in the industry by, for example, putting in reasonable benefits in the law that incentivizes good patent enforcement and defensive practices directed to both sides of the equation. I’m hoping we can dive into that a little bit later.

In general, I think there’s a misunderstanding of how that patent system operates. And I say that because having filed for a patent, having been at a startup where sometimes you make a decision between hiring a new engineer or filing two patent applications, you experience the process first hand – I can tell you they don’t just fall out of the sky.

Last year, for the first time, I actually spent time trying to understand the basis for such intense reform by spending time in Washington D.C., visiting the seat of power and walking through the halls, and meeting with congressional representatives, their legal staff you learn a lot more about the propagation of it and the unfortunate [mistreatment] of the value of patents. In fact, my general takeaway from the experience is there is a lot of work to do and I realized that as a small public company our voice was limited. That should be the case, our company in particular, has intellectual property with a rather long history of licensing alongside product development and selling into the marketplace.

My present message to legislators is to say listen I’m not sure that you have enough information that it represents all sides of the discussion. And knowing that there is likely to be reform my only request is whatever it is that you do, that it be unilaterally applied to both sides. The reason is because we don’t know what the outcome of any reforms will be. In fact, we are only a few years into one of the most comprehensive reforms of the patent system in history, the AIA, and that proved itself to have minimal impact.

My personal view is that the AIA, had it focused on the behavior of patent licensees and prospective licensees/defendants that it might have had a greater impact. I can tell you first hand, and I’m sure everyone else has their own stories, there is as much bad behavior in patent cases on the other side of that equation as well. So what we’re really trying to do is moderate reform initiatives and make sure that there’s enough perspective that applies to both patent owners and prospective licensees.

QUINN: I couldn’t agree more with what you said. Now there’s a lot of different things that you brought up there. One of the things that we should probably spend some time talking about is you walking through the halls of Congress. There are many people that are doing that, there are many people who are talking to staffers and Members, what do you think is likely going to happen in 2015? Do you think that there is going to be this rush to pass something or anything? Or do you think that there will be the opportunity for the industry many of whom now are saying to Congress, whoa, slow up? Do you think that Congress is going to listen to that?

HARTSTEIN: Based on what I’ve seen in the past few months and what is being stated publicly, that there will be more reform. At this point I think both sides of the legislature have commented that reform initiatives will pass. Again, all I’m really pushing for in the debate is 1) moderation and 2) unilateral application of any reforms that are proposed.

QUINN: I wouldn’t mind if certain reforms went through. I don’t know what your thoughts are about demand letter reform but I don’t know anybody in the industry who would be against the FTC stopping fraudulent letters. That should be a no-brainer I think. But then you could go from somewhere where you have a lot of buy in and acceptance to a whole host of things where we really need to be a conversation about whether we should be doing that in the first place rather than just rushing to do it, and I’m specifically thinking about fee shifting.

HARTSTEIN: So it’s interesting you say that, Gene, you know, as we sit here today you or I can have a discussion at any level of detail down to the nuances of prosecution or even what we think about foreign counterparts or where that’s going. The issue I think actually comes up to a higher level and that’s where we have a problem. Intellectual property’s a very complex asset, there should be no controversy or question about that statement. And what I find is that when we talk about things like demand letters, you and I know exactly what that is. That’s a letter that spends very little time on the legal and technical merit, it does not seek to find value for both parties, it actually goes straight to the discussion of price. Many will agree that’s an incredible way of actually trying to monetize intellectual property.

Now the reason why I say it’s a definitional issue because there’s a difference to me between a demand letter and a notice letter. So the problem I have is that, for example, if you were to read a letter from Finjan to a company we are interested in licensing it’s probably a 10 to 15 page discussion on the history of Finjan as a software and hardware technology company. It describes in detail the origin of the intellectual property. It demonstrates some knowledge and understanding and thoughtfulness about how we’ve gone about identifying the potential licensee. And that’s vastly different than what I think is being communicated as a demand letter which sometimes are badly photocopied documents with fill in name here and dollar amount here.

To your question on fee shifting, specifically, the Supreme Court has decided the issue in Octane and a host of other recent cases. From what I understand, the lawmakers on the Hill will generally not push for new law if a problem can be – and has been resolved – through other existing processes such as through the judiciary. However, it appears that the next round of patent reform will push to only impose fee shifting on patent owners who don’t make a product, which is fundamentally – and constitutionally – unfair. What is getting lost in all of this hasty reform rhetoric is we are moving to a “second class” of patent ownership based upon a business model and not resolving the behavioral issues of how patent assets are being monetized in certain instances. Fee shifting should be applied not to a second class of patent owners but directly to either side each of whom should be culpable for any bad actions.

QUINN: Yes, and some of those letters actually leave in the “fill in name here” text when they get sent out. I agree with you, there’s a huge difference. Unless you’re dealing with a situation where one competitor is going after another competitor, you can tell whether you are dealing with a justifiable notice letter that is inviting dialogue and an abusive demand letter by the content of the communication. Aside from competitor disputes patent owners are not going to tell anyone to stop doing what they’re doing, and they aren’t going to threaten to sue, particularly not on some extremely abbreviated schedule. Some of the abusive letters threaten a lawsuit within days, which isn’t enough time to even find a patent attorney to consult with. Legitimate letters from patent owners are going to say please keep doing what you’re doing, but here are our patents and we would like to talk about getting paid for our contribution to your success.

HARTSTEIN: And that was the original notion behind the exchange of publicly disclosing your idea to receive a patent and your ability to maintain a limited monopoly. So I agree with you. You asked another question which was what are some of the changes. So I just gave you for example some of the differences in the types of letters that Finjan sends versus demand letters which are invitations to have a discussion about potentially licensing Finjan’s patents. Other things that I think you would find different, or even willingness on our end for reform would be the very simple things. For example, we have no issue with an increased obligation to keep a patent’s ownership and assignment current.

I completely agree with the notion that anybody on the receiving end of a license request or an enforcement action should know the identity of and the true owner of the assets. I have reached a little bit of disappointment in seeing that the patent office announcing its intent of January of last year to enforce that, to me it seems a very easy noncontroversial idea to try and solve some of these issues. Unfortunately that too was met with conflicting controversy and they backed down from the requirement in October. My understanding of the revolt was from the very companies (large companies) seeking reforms as a purported burden on their own portfolio management as the program was deferred for Congress to consider in its next rounds of reform I think of it in the analogy of my house. There is no way that the county that I live in would allow the tax assessor to not know who was living in the house or how to get a hold of him or her. It’s a scenario that just would not happen.

Another example is to consider modifying and pleading requirements for new cases. I’ve seen complaints filed against multiple defendants that are two pages, the entire second page actually being the signature block. On our end when you look at a complaint it probably then will start with the history of Finjan, what are our contributions to the space were. It will actually go through a thoughtful analysis and an identification of specific products and technologies that we were able to observe from public information. It might give the history of an intent to go through a licensing discussion with that company. And it’s not one to two pages or even ten pages. I mean our complaints range anywhere between 30 and 70 pages.

Finally, I think you’re seeing some increased interest from the judiciary itself. And I know there’s conflict between district courts and the federal circuit and now it seems to be more Supreme Court involvement. But you tend to see the judiciary also recognizing proposed reform initiatives that are already solvable within individual judicial discretion even across jurisdictions. You’re seeing a lot of that in the fee shifting for example as it’s already taking place in various courts around the country despite the failed reform proposal.

QUINN: I do. I think that there’s a lot of activity in the courts and we just passed the AIA a little over three years ago, but the most major changes didn’t go into effect until 22 months ago. And courts are starting to handle these issues increasingly, so I just don’t understand for the life of me why now is the right time to go back in and open up the Patent Act in any kind of major way. Maybe it’s my engineering perspective.

CLICK HERE to continue reading. Part 2 discusses the development of best practices and industry self regulation efforts.